Assessing The Value of Biotech Companies: A case study of Moderna, Inc.

Abstract

This master thesis examines the approaches that can be used to value young biotechnology (biotech) companies. The biotech industry is composed mainly of start-ups that often reach market capitalizations of hundreds of millions, or billions. However, many public-listed biotech companies have negative earnings, or even do not make any revenues. So, how can a company with negative earnings or no revenues be so valuable? The answer is the projects under development. Even though these projects must go through long, and costly developments before being approved for commercialization, they have the potential for gigantic future gains if the product reaches the market. However, there are also high risks embedded in the industry. There is a significant possibility that some products under development may never reach the markets.

When valuing such biotech companies, traditional valuation methods, such as the Discounted Cash Flow (DCF) may not fully capture their intrinsic values, especially because both methods do not account for the possibility that the companies' projects will fail. This thesis will explore, and directly apply, an alternative valuation approach for biotech projects, which is the Risk-adjusted net present value (rNPV) model. The rNPV method modifies the traditional DCF method in order to better reflect the risks of biotech industries, allowing for the inclusion of key inputs variables, such as probability of success of the projects, in that way rNPV can help to better capture the intrinsic value of the projects.

In order to value a whole biotech company, the company can be seen as a portfolio of: - Commercial Products (products currently being sold), and; - Projects (potential products that can create future cash flows). Where each product or promising product is treated as a mini-company. Once all the present values are estimated, the fair value for the whole company can be estimated as the sum of those values.

This thesis is concentrated on the valuation of "Moderna, Inc.", a biotechnology company founded in 2010, and headquartered in the United States. As of January 2022, Moderna has one commercial product (a vaccine against the covid-19 virus), and twenty-one projects under different stages of development.